February 29, 2008 / 5:58 PM / in 10 years

Markets focus on Carney's rate-cut debut

OTTAWA (Reuters) - Markets will get their first clue on just how dovish Canada’s new central bank governor is when they see how big a cut he makes to interest rates next Tuesday.

Most market players expect the Bank of Canada to cut its overnight lending rate by 50 basis points, which would be the boldest cut since late 2001, just after the September 11 attacks on the United States.

But the uncertainty of a new hand on the helm means that a lesser quarter-point cut would not be a huge surprise.

“It’s a very tough call,” said Doug Porter, deputy chief economist at BMO Capital Markets. “We are dealing with basically a new regime and we have no track record here on which to deal.”

Mark Carney, who became governor on February 1, has been careful so far to show continuity with his predecessor, David Dodge, when commenting on monetary policy or the Canadian economy.

But after he puts his own imprint on policy with his first rate decision, he could start to reveal more of his own biases, whatever they might be.

Carney, who hails originally from the investment banking world, has indicated that during his term in office the Bank of Canada will focus more on how globalization and financial market trends affect Canada’s economy.

That could make him more sensitive to dovish remarks on the U.S. economy by U.S. Federal Reserve Chairman Ben Bernanke following a rate-cutting spree in January.

And those who know his personality and powers of persuasion say he would not be shy about taking an unusual stance if he felt it was the right thing to do.

Carney will provide insight into his thinking in a March 13 speech in Toronto entitled “Addressing Financial Market Turbulence.”

Before he stepped down, Dodge made two cuts, bringing the key rate to 4 percent, and signaled that the easing cycle would continue under Carney as weaker exports, a strong Canadian dollar and tighter credit conditions drag down the economy.

Carney made it clear in his first news conference that he was mulling over the magnitude of the upcoming cut. “The timing and degree of that stimulus will be determined at future fixed announcement dates,” he said in Tokyo.

It would all depend on the economic data that emerged, he said. Carney has noted the strength of domestic demand. But some speculate that he worries that the eventual fallout from the global credit crunch may be worse than expected.

“That Canada as an open economy, is sort of at the whim of what’s going on in global financial markets, is something I think Mark believes in,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

Chandler believes that it would be unlikely for Carney to impose his own bias on policy. Rate decisions are made by consensus of all members of the governing council and there are countless checks on the governor’s remarks within the bank before he goes public.

“I really think there’s not much to be gained by trying to strike an independent tone for the sake of being different,” Chandler said.

Reporting by Louise Egan; Editing by Peter Galloway

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